Question 2

Valley Ltd provides the following data:

Net operating profit

$1,800,000

Total assets

$6,460,000

The company's required rate of return is 15%.

Required:

a)Calculate return on investment

b)Calculate residual income

c)The manager is looking into a potential new line of business requiring and investment of $1,700,000 which is likely to realise a profit of $300,000. What decision would the manager reach if performance is measured under:

i.ROI

ii.RI